Last week the Supreme Court of the United States heard oral argument in AT&T Mobility LLC v. Concepcion. The case presents the question whether the Federal Arbitration Act ("FAA") forbids California from overriding a contractual waiver of the right to bring a class action. However the Court decides the issue, the ruling will have important nationwide ramifications for consumers and businesses.

How should the Court resolve the controversy in AT&T? As I explain below, the answer turns on how one best characterizes California law. Perhaps surprisingly, the seemingly straightforward task of figuring out whether a state has consistently applied its own law has bedeviled the courts in cases cutting across a range of subjects. Another case from California that is currently on the Court's docket--this one involving the writ of habeas corpus--presents nearly the same issue. And, as I will explain, the issue was also at the core of the Court's most controversial decision in the last quarter-century: Bush v. Gore.

A "Free" Cell Phone? A Class Action Challenges An Arbitration Clause

The AT&T case began when Vincent and Liza Concepcion responded to an offer for a "free" mobile phone, and yet were later billed a "fee" of $30.22 for that phone. The Concepcions were not alone in being charged a fee for a supposedly free phone, and so they filed a class-action lawsuit against AT&T on behalf of themselves and similarly- situated AT&T customers. (The phone at issue was originally branded under the name "Cingular," but AT&T now markets its wireless service under the AT&T name.)

AT&T defended by invoking the arbitration clause of the standard-form contract that the Concepcions signed for their wireless service. That clause obligated both the Concepcions and AT&T to resolve any disputes through arbitration or in small-claims court, rather than through full litigation. More to the current point, the contract also provided, in boldface and all capital letters, that AT&T and the Concepcions would only bring a claim in their respective individual capacities, "and not as a plaintiff or class member in any purported class or representative proceeding."

So why were the Concepcions initially permitted to bring their case as a class action anyway? The lower courts held that the class-action waiver was unenforceable because it was "unconscionable" under California contract law. Moreover, the arbitration agreement contained a "blowup" clause, under which the invalidation of the class-action waiver would invalidate the arbitration agreement itself. Thus, the lower courts concluded, the Concepcions were not only permitted to bring their case as a class action; they were permitted to do so in federal court.

What does it mean to say that a contract is "unconscionable?" The unconscionability doctrine permits courts to invalidate contracts in whole or in part based on the unfairness of their terms. The question whether the law ought to allow courts to strike contracts and contractual provisions for unconscionability is somewhat controversial among legal scholars and others, because the unconscionability doctrine substitutes judges' views of fair terms for those of the parties to the contract. Nonetheless, unconscionability is a well-established feature of California contract law and of the contract law of other states.

In the Supreme Court, AT&T argues that the particular application of California's unconscionability doctrine to the Concepcions' case violates Section 2 of the FAA. At least on the surface, that looks like a peculiar argument, for although the FAA generally makes arbitration agreements involving commerce enforceable, it specifically authorizes courts to override arbitration agreements " upon such grounds as exist at law or in equity for the revocation of any contract." And unconscionability, the Concepcions note, is a standard ground for revoking any contract, and thus a valid ground for voiding the class-action waiver.

AT&T's Arguments Before the Court

In its briefs and at the oral argument, AT&T offered two principal reasons why the Court should forbid California from applying its unconscionability doctrine to the class-action waiver.

First, AT&T contended that the California approach could be used to completely undermine the FAA. Suppose a state had a law forbidding the contractual waiver of some right that is routinely recognized in litigation, but that arbitration does not respect. Allowing a state to enforce a law forbidding contractual waiver of, say, the right to a jury trial, or a law forbidding contractual waiver of the right to full adversarial discovery, would essentially allow a state to nullify the FAA. Thus, AT&T argues that the authority to enforce state-law provisions used to invalidate "any contract" does not include the authority to insist on the application of legal provisions governing dispute-resolution.

That contention met with considerable resistance from the Justices. Although it is always difficult to say precisely how a majority of the Court will vote based on the oral argument, it does not appear likely that the Court will accept AT&T's first argument--given the fact that a rule barring waiver of class actions does not necessarily favor litigation over arbitration. After all, class actions can be resolved through arbitration, not just through litigation. Thus, in forbidding class-action waivers, California was not forbidding something characteristic of arbitration but not litigation. (To be sure, the blowup clause means that invalidation of the class-action waiver in this case would relegate the AT&T case to litigation, but in general, there is no obligation to include a blowup clause in an arbitration agreement.)

The case may thus turn on a second argument made by AT&T--namely, that California unconscionability law does not really apply to class-action waivers. Unconscionability, AT&T notes, is a doctrine about fairness to the contracting parties. Here, the lower courts found the class-action waiver unconscionable because of the potential for unfairness to third parties, not the Concepcions themselves. The Concepcions, AT&T says, could have had their own claim resolved fairly in individual arbitration.

It is not clear that AT&T is correct about the underlying factual premise, however. One important function of class actions is to create adequate incentives for people to contest legal wrongs that result in small individual harms, but that cause a great deal of harm in the aggregate. AT&T has millions of wireless customers, and thus, improper charges on the order of $30.22 can add up to a very substantial sum.

At the same time, for each recipient of a "free" phone, the rational response to receiving a bill for $30.22 is simply to pay it, rather than to take the time to bring a challenge to the bill to arbitration or litigation. Certainly, no lawyer will take a case promising a recovery of $30.22. But a class-action lawyer who represents thousands of plaintiffs will be much easier to find. By permitting class treatment, the law gives lawyers an incentive to police--and thus, the law deters--repeated small-scale fraud.

In holding that California law voids class-action waivers, the lower courts were arguably saying that a standard-form class-action waiver is unfair to everyone who signs it, including the Concepcions. If so, then AT&T would be mistaken in its contention that California had departed from its ordinary principles of unconscionability by focusing on third parties.

A Vexing Aspect of the Case: How to Discern Changes in State Law

Suppose, however, that AT&T is correct that unconscionability doctrine ordinarily only concerns itself with unfairness to the parties to the contract, rather than unfairness to third parties. Suppose further that AT&T is also correct that the only unfairness in the Concepcions' case concerns third parties, not the Concepcions themselves.

Even then, so what? Contract law is state law, and if California chooses to expand its unconscionability doctrine to cover third parties, isn't that still California contract law? Justice Elena Kagan put the point aptly in the oral argument: " It may be a good unconscionability doctrine or it may be a bad unconscionability doctrine, but it's the State's unconscionability doctrine."

After some further back and forth with the Court, Andrew Pincus, the lawyer for AT&T, answered in the only way available to him--essentially, by arguing that California unconscionability doctrine doesn't really protect third parties from unfairness. He contended that California had formulated a special rule designed to undermine arbitration. If AT&T could prove that, then he would have a strong case, for then, California would not be applying the same legal principles that, as the FAA requires, apply to "any contract."

But how could AT&T prove that? States are permitted to change their contract law over time, and so it would not even be sufficient to show that California had not previously applied its unconscionability doctrine to police fairness (and unfairness) to third parties. AT&T would have to somehow show that even as California purported to apply its unconscionability doctrine to class-action waivers, the state was lying about its true motives.

The Same Problem Has Arisen in Two Other Contexts

Fortunately for the Court, the question of whether a state is, on one hand, applying a consistent rule of law or, on the other hand, fashioning a special rule to defeat a federal right has come up repeatedly outside the context of arbitration. Unfortunately, however, the Court's cases in these other contexts are themselves controversial.

During the oral argument, Mr. Pincus, the AT&T lawyer, suggested that the Court should borrow the test it uses when deciding whether there is jurisdiction over a case in which a state court has considered both state law issues and federal law issues. Under longstanding doctrine, the Supreme Court will not hear a case in which there are "independent and adequate" state law grounds for the state court ruling. Essentially the same rule applies to federal district courts deciding whether to entertain a habeas corpus petition from a state prisoner.

Here is the test: In each context, the cases explain that there is no reason for a federal court to review a decision of federal law if the state grounds provide a sufficient basis for the outcome. After all, state courts are the final arbiters of state law, and so federal-court review of a case in which state-law grounds fully support the judgment could not change the outcome.

Note, though, that the precedents do not merely require that the state law grounds be independent of the federal law grounds; they must also be "adequate"--a requirement that ensures that the state courts really are relying on state law, and not merely pretending to rely on state law as a pretext for undercutting the federal law claim. Thus, federal courts review the "adequacy" of state-law grounds by examining state case law to see whether the state courts have consistently applied the putative state law principles. That is what AT&T urges that the Supreme Court should do with respect to California's unconscionability doctrine.

The problem is that in another case to be argued this Term, Walker v. Martin, the warden and an amicus for the warden have asked the Court to modify or abandon the adequacy inquiry on the ground that it is too costly, at least in the habeas context. Now, I happen to think that the adequacy inquiry should be retained--as I informed the Court in a countervailing amicus brief on behalf of myself and other Federal Courts scholars--but the back and forth in the Martin case shows that there is at least some dispute about the appropriateness of inquiring into the consistency of state court judgments. Adopting the adequacy inquiry from the independent-and-adequate-state-law doctrine would simply transfer that controversy to the arbitration context.

The same issue arose ten years ago, in yet another-- and far more momentous-- context. In ending the statewide ballot recount that had been ordered by the Florida Supreme Court in December 2000, a majority of the U.S. Supreme Court in Bush v. Goresaid that the absence of uniform standards rendered the Florida recount unconstitutional as a denial of equal protection. But three of the five Justices in the majority also offered an alternative ground for their decision: They said that the recount was invalid because the Florida Supreme Court's interpretation of the state statutes governing recounts was so creative that it effectively had re-written the statutes, thus violating the requirement of the Constitution's Article II that the state legislature (not its courts) prescribe the rules for Presidential elections. The concurring Justices said that this approach was "precisely parallel" to the adequacy determination in the independent-and-adequate-state-law context.

Needless to say, the Bush v. Gore concurrence was, and remains, controversial. In particular, the dissenters thought that it showed far too little respect for state courts to say that they had misinterpreted their own law. The very same argument (of insufficient deference by federal to state courts) is available--and was clearly in play during the oral argument--in the AT&T case.

In the end, there is no getting around the fact that federal-court review of state-court decisions on matters of state law is inherently difficult. On one hand, searching review may be necessary to ensure that state courts are not using state law to undercut a federal right--whether it is the right to arbitration, the right to habeas corpus, or the right to state legislative control over the procedures used in Presidential elections. On the other hand, such searching review puts the federal courts in the position of sitting in judgment of state courts on matters of state law--matters as to which state courts are ordinarily supreme.

AT&T is a hard case because it implicates delicate questions of federalism. Accordingly, the stakes in this dispute that arose from a bill for $30.22 turn out to be extremely high.